For much of 1998, the giant of credit card processing seemed in danger of taking a hard fall.
Managers at First Data Corp. were being hired and fired, lines of business were sold left and right, and the stock price tumbled as Wall Street threw up its collective hands in frustration.
Even as First Data kept winning accounts while maintaining its top position in transaction processing, it was perceived as a company in trouble.
With a new year and new structures in place, "We feel more and more like the First Data of four years ago than the First Data of last year," said Charles T. Fote, 50, who became president and chief operating officer in September.
When he took over, the 24-year First Data veteran was called upon to realize the benefits from the dominance First Data thought it had bought in 1996. That was the year First Data Merchant Services was created through the mergers of Card Establishment Services and Nabanco, which was a division of a larger company First Data purchased, First Financial Management Corp.
First Data already was tops in handling cardholder accounts for banks, and that deal made it No. 1 on the merchant side of the business as well. Some credit card executives sounded warnings about First Data's market power and ability to create a "closed loop" for payments within its network, bypassing the MasterCard and Visa utilities.
But the alarms faded as First Data faced problems of its own, including the loss of some banks in its merchant-alliance program and ensuing management disarray.
A few recent wins have helped to restore confidence.
Bank One Corp.-whose merger with First Chicago NBD Corp. cast doubt on its commitment to First Data-has signed comprehensive card processing relationships. Last week Bank One said it would convert accounts in First Chicago's First Card portfolio, long processed in-house, to First Data.
Four months earlier, First Data's Western Union division, formerly also part of First Financial Management Corp., signed a five-year deal with Kmart Corp. to provide money order and transfer services in its 2,115 stores.
First Data's travails were reflected in its 1998 earnings report. Revenues were down 2%, to $5.1 billion, but net income rose 6%, to $213 million.
First Data, which now has its headquarters in Atlanta, is at a "turning point," said Richard K. Weingarten, a director at Salomon Smith Barney. "The company is moving in the right direction, and there are a lot of things to be excited about."
He credits Mr. Fote with stabilizing the merchant business, which was run until last year by Roger Peirce, a former Visa International technology executive.
Mr. Peirce joined First Data in 1994 and brought several trusted Visa colleagues with him. He built up the merchant bank alliance program. In about a dozen of these joint ventures, the bank owns and manages the merchant relationship while relying on First Data for processing support.
Mr. Fote's next step, Mr. Weingarten said, will be to focus more on the card-issuing part of the business, which saw profits decline 4% in 1998, to $264 million. Revenue increased 6%, to $1.43 billion.
According to First Data, the division that processes for card issuers has more than 40 million new accounts signed and scheduled for conversion in 1999.
Three of the major additions-GE Capital, Peoples Bank of Bridgeport, Conn., and Spiegel-previously used the second-largest company in the field, Total System Services Inc., said David P. Bailis, executive vice president of First Data's Card Services Group in Omaha.
Total System, a Columbus, Ga., subsidiary of Synovus Financial Corp., beat First Data for a coveted contract last year with Sears, Roebuck and Co.
Mr. Fote described 1998 "a year of assessing our strengths and weaknesses."
Business lines deemed peripheral to payment services were sold or folded. This included a Houston-based credit reporting service, Innovis, which contributed to a $231.5 million loss. A health care division and other noncore subsidiaries were sold, for after-tax losses of $333.9 million.
"We relocated people, we disengaged people, we brought some new people on," Mr. Fote said in an interview. "I think we have a team that positions us to go forward."
He attributed the recent problems to "arrogance" among outside "experts" whom First Data hired as managers. They neglected the talents of people who grew up in the companies First Data acquired, he said, which spawned morale problems that "cannot be fixed overnight."
Mr. Fote, who joined First Data in 1975 when it was part of American Express Co., said the company now has the right "operating formulas," but added, "We are not perfect by any means." In contrast to the overconfidence that "happened to us about four years ago," he said, "now we always want ourselves to think we are no better than 80% perfect."
Internal objectives center on controlling costs and making more voices heard, Mr. Fote said, because "people have to know they're important."
Operationally, the company has been streamlined to three core businesses: merchant processing, cardholder processing, and payment instruments; the last includes Western Union.
"We've always had a corporate objective to be No. 1 or No. 2 in a market," Mr. Fote said. "As we look into 1999, our product offerings are more stable than they were a year ago, and now we go grow our positions in the markets we serve."
Last week, the outlook was good enough for Lehman Brothers analyst Patrick Burton to upgrade First Data for the first time in more than a year-to "outperform" from "hold." The Bank One-First Chicago consolidation was a big factor.
"I'm sure they had to give some pretty big price discounting, but net- net it's a positive," Mr. Burton said. First Data is "just in a plain good position there, because they do about 40% of the market."
Franco Turrinelli, an analyst at William Blair & Co. in Chicago, said the Bank One announcement was "extremely significant" because it "removes some clouds of uncertainty around the First Data story."
The prospect that Bank One might pull its business from First Data was "worrying analysts and investors, especially as it might have had an impact both on the card-issuer and merchant-processor sides of the business," Mr. Turrinelli said.
First Data's yearend earnings statement shows "the extraordinary strength of the Western Union business," which saw money transfer transactions increase 29% in 1998, Mr. Turrinelli said.
First Data is "clearly doing everything they said they would do in terms of focusing on the operational aspects of the company and reducing the cost structure," he said. "I think they're in a stronger position than they were a year ago, and I think the current stock price reflects it."
For investors, the analysts said, one problem was that expectations were too high. In a mature business like card processing, it was unrealistic to anticipate the type of growth enjoyed by some other technology companies.
"The end-market growth opportunity is less than what it was five years ago," Mr. Burton said. "First Data is really a 10% to 12% growth company, not 20%. Once market expectations accepted that, the stock hit bottom."
The low was in August, the month before Mr. Fote, who previously had overseen merchant processing and payment instruments, was elevated to COO. He is based in Englewood, Colo.
Another low point came in the fall, when BankAmerica Corp. and NationsBank Corp. decided to combine their merchant processing in the BankAmerica spinoff, BA Merchant Services. That meant withdrawal from Unified Merchant Services, the joint venture that the old NationsBank had with First Data.
"The alliance strategy works," said Mr. Fote, underscoring the company's continued commitment to the bank partnerships. Not every alliance is performing the same, he said: "It's like having seven or eight kids-there are some good ones and some bad ones."
Instead of trying to form more bank alliances, Mr. Fote said, the division will focus on signing up more merchants, expanding its sales force to do so.
International business will continue to be a priority, Mr. Fote said, especially in Europe, Mexico, Canada, and Brazil. But the United States will remain the center of things.
Last year, First Data converted credit card portfolios belonging to Wells Fargo & Co., Partners First, SunTrust Banks Inc., and Lloyds TSB of the United Kingdom, and the debit card portfolio of BankBoston Corp. New England Bankcard Association announced Monday that it had renewed its processing agreement with First Data for five years.
In June, First Data won First Union Corp.'s consumer card processing business, which had belonged to Electronic Data Systems Corp. of Plano, Tex.
"Most of the big fish have been caught and fried," said Mr. Burton of Lehman Brothers. First Data has contracts with two of the four largest card issuers-Bank One and Chase Manhattan Corp. The other two, Citigroup and MBNA Corp., do their work in-house.
In the banking industry, "the pace of consolidation will continue-it's a reality," said Mr. Bailis of the card-issuing group. This trend, he said, "presents both challenges and opportunities. We have chosen to pair ourselves with what we believe are the winners of tomorrow, the net acquirers."
"They've started to prove that they're back," said Mr. Weingarten of Salomon Smith Barney. "But I think they need to put up some good quarters to fully convince Wall Street. If they do that, the stock is going higher."
